The Housing Mirage

Prices are up, but the market is far from healthy. We're missing key elements of a true recovery

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If housing is back, why is the percentage of people who own homes lower now than it was over a decade ago? That's one of the many paradoxes of the housing recovery that's ostensibly under way in the U.S. It's true that home values began rebounding from their post-financial-crisis trough 15 months ago. The latest S&P/Case-Shiller index data show the largest monthly gain in home prices since 2005. But the percentage of Americans who are homeowners is still declining from its peak in 2004, the market is bifurcated (sections of Washington and Los Angeles are booming, while Detroit and California's Inland Empire are still coping with foreclosures and homes with mortgages that are underwater), and the federal government is underwriting nearly 9 out of 10 new mortgages via a multitude of state-sponsored programs and federally backed bonds. If a healthy housing market is one that is inclusive and not dependent on government support, "we're a long way from there," says Yale professor and housing expert Robert Shiller.

How to create a truly healthy housing market is a question that matters to everyone. Economic research shows that gains in housing wealth are likely to spur more consumer spending than gains in stock wealth are--and getting people to spend more is crucial to a sustainable recovery in an economy that is 70% driven by consumer spending. Homeownership isn't for everyone. We got into trouble handing out too many mortgages, including "liar loans," to unqualified buyers. Today the problem is that a relatively small group of rich investors--not typical would-be homeowners--is driving the real estate market. That includes private-equity titans like Blackstone (which owns a portfolio of 20,000 rental properties) as well as high-wealth individuals who can pay cash up front for a property for themselves or to rent out. "Investors remain the dominant force behind the house-price bounce back," says Capital Economics property economist Paul Diggle. That's reflected not only in the lower rate of homeownership but also in the swelling ranks of renters. Not since 2002 have fewer rental properties been empty in the U.S., and rents are rising sharply in many cities.

Most ordinary home buyers, meanwhile, need mortgages to buy real estate. But they can't get the loans; banks are keeping credit tight. "The perception of credit risk is still just like it was right after Lehman Brothers fell," says Jonathan Miller, CEO of the New York City--based real estate appraisal company Miller Samuel. Even senior government officials admit that banks are reluctant to provide more standard 15- or 30-year fixed loans to individuals until they know more about the new rules of the road under the Dodd-Frank reforms. Among other things, banks want to know how much capital they'll be required to hold and whether they'll be allowed to mix lucrative trading with plain-vanilla lending. Sadly, regulators are still writing the rules nearly three years after Dodd-Frank was signed into law.

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